By Natsuko Waki and Sujata Rao
LONDON Feb 27 Geopolitical tensions reverberated through emerging markets on Thursday, driving Russia's rouble to five-year lows against the dollar while the newly unshackled Ukrainian hryvnia tumbled 9 percent and central European assets also weakened.
Russia's defiant response to the political turmoil in neighbouring Ukraine spooked investors, with Moscow quoted as saying fighter jets along Russia's western borders had been put on combat alert.
Moscow has also said it would defend the rights of its compatriots in a "strong and uncompromising" manner, while Kiev warned the Kremlin against any troop moves in Crimea, which has a big ethnic Russian population.
"People are drawing parallels with the 2008 Russia-Georgia war," said Manik Narain, a strategist at UBS in London.
"There are definitely fears about geopolitics, (at a time when) the general mood towards emerging markets is not great. The concern is this could develop into a proper civil war in Ukraine that splits the country."
While the ripples from Ukraine spread as far as Asia, the biggest impact was felt closer to home.
The hryvnia hit a new low against the dollar, trading beyond 11 per dollar a day after the central bank said it was no longer supporting the currency. Its year-to-date losses amount to around 25 percent.
The country's credit default swaps rose 24 basis points, according to Markit.
The crisis is taking a heavy toll on Russia, whose banks are estimated to have a $28 billion exposure to Ukraine as well as major trade ties, including gas exports.
The rouble fell as low as 36.11 per dollar and hit a record low against a dollar-euro basket, staying just off a record low to the euro
Russian stocks fell 1.4 percent in their biggest one-day loss since early-January, led by VTB Bank whose shares plunged more than 3 percent. State-controlled Sberbank and gas monopoly Gazprom lost more than 1 percent on the day.
"The rouble will be the main victim here on the back of the situation in Ukraine. There's a lot of economic ties and political involvement as well," said Abbas Ameli-Renani, a strategist at RBS.
While many political risk analysts reckon an outright military conflict is unlikely, Ameli-Renani predicted "a period of over-reaction" on financial markets.
"Increasingly, given the border shared with Hungary and Poland, central Eastern countries are coming into focus, as seen in the reaction of the zloty yesterday," he said.
The zloty, central Europe's most liquid currency, fell 0.2 percent to the euro to two-week lows after losing 0.6 percent in the previous session. The forint fell 0.25 percent and shares in Hungary's OTP Bank, which has operations in Ukraine, fell 2.6 percent to July 2013 lows.
Turkey's lira fell for the fourth straight session, trading down 0.7 percent to 2.24 per dollar and also hit by domestic problems, with audio recordings appearing to implicate Prime Minister Tayyip Erdogan in corrupt dealings having emerged this week.
He denies the accusations and said the tapes are fake but the affair is causing jitters before local elections in March.
The Romanian leu outperformed however, rising 0.4 percent after President Traian Basescu, in a weeks-long standoff with the government, abruptly threw his weight behind a 4 billion-euro aid agreement with the IMF.
The broader emerging equity index rose 0.4 percent thanks to a rebound in Chinese shares. While the Chinese yuan extended its recent slide initially, it later recouped the losses, helping to calm Asian markets
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